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(Kitco News) - There is a lot of doom and gloom in the gold market as prices end the week at their lowest point since April 2020; however, as dismal as the gold price looks, there is a small ray of light breaking through the dark clouds.

The market has given up $1,700, but it is managing to hold critical long-term support between $1,680 and $1,675 an ounce. This doesn't sound like much, but if support can hold, the market will have built a solid base at a critical long-term level. For many analysts, a break below $1,675 would signal an end to gold's three-year uptrend.

The gold market finds itself in another do-or-die scenario after markets were surprised by stubborn inflation in the U.S. Economists were expecting falling gasoline prices through August to bring down inflation, giving the Federal Reserve room to slow the pace of its aggressive monetary policy tightening.

However, the inflation data painted a much more drastic picture of the economy. Yes, energy prices came down in August, but it wasn't enough compared to the rise in food, shelter and medical costs. For the year, the U.S. Consumer Price Index rose 8.3% last month, versus expectations of an 8.1% rise. The data showed that inflation is becoming more entrenched, and there are expectations that the U.S. central bank will have to be even more aggressive.

Following the CPI data, markets started pricing in a chance of the Federal Reserve raising interest rates by a full 1% next week. Heading into the weekend, markets see a 16% chance of that happening.

But beyond September's meeting, markets see a much higher terminal rate for the Fed Funds rate. Before the CPI, economists expected rate hikes to top out around 4% by the end of the year. Now markets expect the terminal rate to rise to at least 4.50% by March. This has provided more momentum to the U.S. dollar and pushed 10-year yields to their highest level since April 2019.

That is the bad news, but before you get too discouraged, there is some good news; a slight sliver of hope for gold investors. Investors expect the central bank to be fairly hawkish next week, but if Fed Chair Jerome Powell doesn't meet these elevated expectations, we could see some profit-taking in the U.S. dollar, which could drive gold prices higher.

Gold market could be in trouble; bearish sentiment is rising as prices test critical support around $1,675

Of course, as grizzled traders have told me more than once before: if your trading strategy relies on hope, you need to change your strategy.

While gold's trading outlook is pretty gloomy, from an investment perspective, the precious metal continues to play an essential role in a portfolio as a safe-haven asset. If you thought gold had a bad week, I hope you are not in equity markets. Inflation fears caused U.S. equity markets to see their largest one-day selloff since June 2020.

The S&P 500 is ending its worst week since July, falling below 3,900 points Friday. The broad equity index is down more than 19% this year, while gold is down 8%.

This week Robert Kiyosaki, best-selling author of Rich Dad, Poor Dad, told Kitco's Editor-in-Chief Michelle Makori that the economic situation is going to get worse and investors need to protect themselves with hard assets like gold and silver.

Have a great weekend

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.